Twitter And Facebook Are Grossly Overvalued
If a short selling genie granted me two wishes, my first would be for Twitter or Facebook to IPO. My second would be for a mid-sized company like Yahoo to acquire Facebook . This way, I can finally take advantage of these companies gross overvaluations.
Internet advertising is maturing. It is easy to target ads by location and context. There are no ‘monetization issues’ anymore for large sites. If your site is not making much money, it is because the traffic is not worth that much. End of story.
Unlike television, where you are sending out a message to millions of random people, internet advertising is highly personal….and in the internet world, all people are not created equal.
Some traffic is much, much more valuble than other traffic. Someone in North Carolina searching specifically for debt consolidation or a divorce lawyer? A firm in one of these industries will pay a hefty price for that lead since that sort of lead is very valuable to them and will likely convert into a paying customer.
This isn’t a theoretical debate. Internet traffic can be tracked 100% of the way. The law firm in the above example can track the clickthrough rate of the ad, the lead generation rate, and the amount of revenues derived from the ad. Thus, they can tell if the ad is making or losing them money. It’s truly capitalism at its best.
The effect of this so far on internet advertising rates? Someone searching for a high-margin service is worth literally 1000 times (at least) that of some random facebooker looking around profiles.
I see this phenomenon on own websites. The more targeted and the better paying the niche means the traffic is worth more. Someone actively searching for say, relationship advice, is worth a lot more than someone in a relationship just browsing Facebook or some internet forum. Facebook would have you think otherwise, but they are deluding themselves.
Someone actively looking for relationship advice is more likely to buy a product to improve their relationship. Someone that happens to be in a relationship may be curious as to the ad, but is less likely to click, and even less likely to buy the product.
When a person is searching, you know what is on their mind. They spell it out to you what sort of product they are looking for. If they are just browsing a friend’s Twitter or Facebook page, all they are doing is browsing. Even if you base ads on what the person gives you in his or her profile, let’s say they are a dog lover, there is only so many dog advertisements you can throw at someone. They may also not be looking for any dog-related products anytime soon.
You are guessing at what they want; they are not telling you. You are hoping they look at your ad; they are not actively looking for your product.
Ad blindness, in particular, is a major issue. It is well-known in the internet business that new visitors are worth more, much more than returning visitors for an advertising-based site. Previous visitors are likely ad blind to the site. They are also less likely searching for something to buy through the site’s advertisements; they are more likely just reading for recreation.
If Twitter has not been able to monetize successfully by now, I doubt they will likely do so in the future. From what I can tell, Facebook is well monetized and their advertisers are likely grossly overpaying. This is just my personal speculation, but based on reports I have read, I would guess that Facebook’s CPM is around $.40 (or better), which is well over 5-10X what a website similar to Facebook would get. That’s a hefty premium, especially considering Facebook’s traffic is a bunch of ad-blind college kids mindlessly browsing the site. Facebook will always command a premium, it is after all a ‘cool,’ large website, but I doubt this sort of premium will continue for long.
It’s not 1999 anymore. If an internet company with a tremendous amount of traffic is not able to make money, it is because their expenses are too high and their business model is poor. The ‘build traffic and the profits will come’ is a good line to sell to technically-unsavvy investors throwing money after the latest fad, but it can only work so long, especially in this deleveraged environment.
I doubt Google will buy Twitter, and even if they do, the size of the acquisition is too small to matter to Google. Even if Twitter is truly worth zero and Google pays $1 billion for it, that is less than 1% of Google’s market cap. However, letting Yahoo gobble up Facebook for $5-$10 billion would be a great reason to short YHOO. It could well end up being Yahoo’s Vietnam War, or should I say AOL acquisition.
Today’s tulip speculator is the person paying over 10X EBITDA for either of these sites. From what I can tell, their valuations well supercede this, even in the illiquid private market.
Disclosures: None.